Tax Credit vs. Tax Deduction
Most people want to reduce their tax bill as much as possible. So they look for all of the tax deductions that they can find. While this is a great way to lower your taxable income, to really look for a reduction in your tax bill, you want to look for all of the tax credits that you can find.
If you are working on preparing your taxes, and you are wondering the difference, don’t worry. Most people we talk to only have a little bit of an idea of what the difference is between a tax credit and a tax deduction. Keep reading as your accountant in Billings explains.
What is a Tax Deduction?
Every year, when you file your taxes, you have to report how much income you made. Most of the money you make is subject to taxes. But the government does allow you to reduce the amount that you report when you have spent that money elsewhere. These tax deductions lower the amount of money that you have to report, and subsequently lower your tax bill.
For instance, if you spend $2,500 on property taxes in any given year, the government doesn’t want to tax you again on that money. So you can deduct the amount spent on property taxes off of your taxable income.
Assuming that you are in the 25% tax bracket, deducting that $2,500 will lower your tax bill by $625.
What is a Tax Credit?
Tax credits are far more valuable than tax deductions. In order to encourage people to pursue more education, adopt children, and a variety of other pro-social activities, the government offers tax credits. These credits will lower a person’s tax bill dollar for dollar.
For instance, let’s suppose you spent $2,000 on tuition to earn your degree this year. That’s good for the economy, good for you, and good for everyone all around. The government wants to make sure that you’re not being taxed on that $2,000, and because they’re so generous they actually want to reward you. You can claim the American Opportunity Tax Credit and receive a credit toward your tax bill.
Regardless of which tax bracket you are in, a credit worth $2,000 will lower your tax bill by $2,000.
How to Maximize your Credits
If you’re wondering how to do your own taxes, and maximize your refund, then you need to pay attention here. Maximizing your credits will go the furthest to offsetting your tax bill.
To reduce how much you owe in taxes the most, you need to be aware of which credits are available to you. Here are a few that you may be able to claim:
Naturally if you are working with an accountant, such as one of the professional’s at Practical Taxes, then they will automatically check to see if you qualify for one, or more, of these credits.
Let Practical Taxes help find Tax Credits for you
There is no need to slog through your taxes every year. Instead, an accountant at Practical Taxes can take care of all of the tax preparation work for you. You bring in your documents, we find you the biggest refund possible, and you only have to worry about collecting your check from the government. It really is that simple.
Want to learn more about how we can help save you a lot of time and money? Give us a call at 406-894-2050 and learn about our tax preparation services in Billings, MT.
Great article.